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Economic Analysis: Supply and Demand, Nash Equilibrium

Question 1
The market for olive oil in new York City is controlled by two families, the Sopranos and the Contraltos. both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing oil is constant and equal to $40 per gallon in either family. There is no fixed cost. The table below gives the market demand schedule for olive oil.

Price of olive oil Quantity demanded
(per gallon) (gallons)
$120 1,000
$110 1,500
$100 2,000
$90 2,500
$80 3,000
$70 3,500
$60 4,000
$50 4,500
$40 5,000
$30 5,500

Suppose the Sopranos and the Contraltos form a cartel. The two families share the market equally (each produces one-half of the total output of the cartel). How much profit does each family make?

$72,500

$70,000

$65,000

$62,500

Question 2

The market for olive oil in new York City is controlled by two families, the Sopranos and the Contraltos. both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing oil is constant and equal to $40 per gallon in either family. There is no fixed cost. The table below gives the market demand schedule for olive oil.
Price of olive oil Quantity demanded
(per gallon) (gallons)
$120 1,000
$110 1,500
$100 2,000
$90 2,500
$80 3,000
$70 3,500
$60 4,000
$50 4,500
$40 5,000
$30 5,500

Suppose the Sopranos and the Contraltos form a cartel. The two families share the market equally (each produces one-half of the total output of the cartel). Uncle Junior, the head of the Soprano family, breaks the agreement and sells 500 more galons of olive oil than under the cartel agreement. Assuming the Contraltos maintain the agreement, how does this affect the profits earned by each family?

Sopranos: + $7,500; Contraltos: +$7,500

Sopranos: +$7,500; Contraltos: -$7,500

Sopranos: +$7,500; Contraltos: -$12,500

Sopranos: +$12,500; Contraltos: -$7,500

Question 3

The market for olive oil in new York City is controlled by two families, the Sopranos and the Contraltos. both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing oil is constant and equal to $40 per gallon in either family. There is no fixed cost. The table below gives the market demand schedule for olive oil.
Price of olive oil Quantity demanded
(per gallon) (gallons)
$120 1,000
$110 1,500
$100 2,000
$90 2,500
$80 3,000
$70 3,500
$60 4,000
$50 4,500
$40 5,000
$30 5,500

Suppose the Sopranos and the Contraltos form a cartel. The two families share the market equally (each produces one-half of the total output of the cartel). Uncle Junior, the head of the Soprano family, breaks the agreement and sells 500 more galons of olive oil than under the cartel agreement. Anthony Contralto, the head of the Contralto family, decides to peacefully retaliate and in response to Uncle Junior's cheating, Contralto raise their sales by 500 gallons as well. How much profit does each family earn now?

$50,000

$52,000

$62,500

$65,000

Question 4

Based on your answewrs in Q1 -- Q3, construct the payoff matrix for the game, in which there are two agents: the Sopranos and the Contraltos; each has two strategies: keep the agreement or cheat. Identify the Nash equilibrium in this game, if there is any.

Solution Summary

The price of olive oil quantity demand is determined. A market demand schedule is provided.

$2.19